The Bank of Canada (BOC) target inflation to land between 1-3%. Last month's Core CPI hit 1.9% on an annualised basis, so when compared to the masses, inflation is not at all bad when many central banks are fighitng disinflation.
The monthly read however suggest we may have seen a high on the annualised read in Q4 2015, but if we see this rebound tonight from -0.5% (and maintain a positive trajectory over subsequent reads) then this will help the annualised read remain around the 2% mark.
In Janurary's rate decision the bank opted to keep rates on hold at 0.5% and had a rosey outlook of the economy. Inflation is target at 2% by 2017, so for the time being the bank is confident it can keep inflation maintained and fend off disinflation. What may see inflation higher over the coming months is oil lower oil process leaving the CPI equation. If this is the case and inflation is sent higher then we could even consider a scenario where the bank has to raise rates to keep it below the 3% level. When you consider what a rocky start we have had to the year around the globe, it almost feels odd writing about a G10 nation considering raising rates.
Either way, when you combine my bias for a weaker USD in the near-term and the potential for inflation to tick higher (and traders anticipate a rate rise) then this could help keep the pressure on USDCAD. Of course the caveat here is what actually happens to the oil prices, as Saudi Arabia stated overnight they had no intention of cutting production to send the commodity lower once more. If we do see a high in production reached and a combined effort from OPEC members to cap production then this should bring further pressure upon USDCAD.
Technically USDCAD is reaching a crossroad. This is one of several USD crosses which it such a juncture and was covered in more detail in yesterday's video. Price has already formed a prominent swing low outside the the Bollinger band at the beginning of Feb and price is now stabilising around this swing low (with monthly S1 and 91.8% providing additional support). When we also take the bullish channel/trendline into consideration then there is a solid case for the channel to remain intact for now.
If we do see a downside break then next support levels sit around the 1.346 swing high and 1.3228-86 (200 day MA and monthly S2).
Trader remain net short on CAD futures but we have seen a reduction of short exposure whilst CAD has bounced form the multi-year lows. However open interest has also reduced during the bullish rally, and price continues to remain below ley swing lows. Therefore the bearish trend remains intact on CAD, which could favour another leg higher on USDCAD over the coming week/s.
USDCAD steady above 1.35 - inflation up next
Technically the cross has hit a juncture but upon weighing up the technicals and sentiment, suspect the bullish channel may hold for the time being.